Sunday, 10 July 2016

The Paris Climate Change Conference last December was hailed as a great success. As countries signed the Agreement in April there seemed an even stronger sense of optimism. UN Secretary-General Ban Ki-moon was quoted as saying: "Paris will shape the lives of all future generations in a profound way - it is their future that is at stake." A recent article in Nature entitled 'Paris Agreement climate proposals need a boost to keep warming well below 2°C' provides a more sombre and depressing view. And the sad reality, is that the Paris Agreement is probably a step backwards, not a historic step forwards, in the fight against climate change.

The goal of previous climate agreements, like the Kyoto Protocol, was to provide binding commitments to reduce dangerous emissions. Kyoto, and all attempts at a follow up agreement, failed dismally to work. But, at least the objective was a sound one - to tackle the problem. In Paris the objectives were far less ambitious. Essentially the goal was to agree what the problem is. And, truth be told there was not much agreement on this as countries argued whether humanity could survive a 1.5°C or 2°C rise in global temperatures.

In terms of how to actually tackle the problem there was very little in Paris to get excited about. Each country basically suggested ways that they could voluntarily cut emissions. Note that there is no viable compulsion for countries to do what they said. Moreover, even if every country sticks to their word there is still no chance of keeping temperatures below the 2°C cut-off. So, all we can basically take from the Paris Agreement is that we are doomed: we agree that there is a problem but have no plan to tackle it! This interpretation is, of course, not the one being espoused by politicians or campaigners and the media. And therein lies my biggest concern because we do not have time for false optimism if climate change is going to be brought under control.

So, why is it so difficult to reach a global climate agreement? Averting climate change is similar to providing a threshold public good. If we cut back on emissions enough then everything should be fine. If we do not cut back enough then expect the consequences. In principle, threshold public goods can be voluntarily provided. In particular, there are Nash equilibria where nations acting independently avert catastrophe. The intuition behind this result is one of criticality - if nations collectively do enough to just avert catastrophe then it is in each countries interest to do their bit because they are critical to avoiding catastrophe. Most of the economic literature on climate agreements has pretty much taken it as given that the existence of Nash equilibria where catastrophe is avoided is good news. Basically, we should be able to build an agreement that works. In reality, however, things are not so simple. I will give two reasons why.

First, the threshold around which catastrophe can be avoided is uncertain because scientists cannot say exactly how much emissions are too much. As pointed out by Scott Barrett in a 2013 paper in the Journal of Environmental Economics and Management, this is bad news. Essentially, threshold uncertainty undermines criticality in the sense that a country can no longer be sure that their contribution is critical to averting catastrophe. Maybe catastrophe would be avoided without them, or maybe their efforts can do nothing to avert catastrophe; without knowing more about the threshold we cannot say. If there is too much uncertainty then avoiding catastrophe is no longer a (Bayesian) Nash equilibrium. And clearly there is considerable uncertainty about climate change.

Second, even if we have a certain threshold there is no guarantee nations can turn a Nash equilibrium into reality. The problem here is a multiplicity of equilibria. There are lots of ways catastrophe could be avoided: the US cuts back a lot, China cuts back a lot, etc. The consequence of this is that any agreement to enact a particular set of targets can very easily unravel. In terms of criticality, the issue here is uncertainty over what other's will do. For instance, if the agreement says that the US should cut back a lot but the EU expects the US to not do that then we have uncertainty and things unravel. (Note that it is in the US interests to appear as though it will cut back less because this incentivizes the EU to cut back more, etc.) In a recent paper with Federica Alberti published in Public Choice we argue that something stronger than Nash equilibrium is needed to be truly confident public goods can be provided. We use the concept of a collectively rational recommendation. Unfortunately, our results are little use when applied to climate change because our approach requires someone who can credibly oversee any agreement. In other words, we need someone who can make sure the US, China etc. stick to their promises. And clearly, no such institution currently exists.

Do not, therefore, be fooled by bold pronouncements about the Paris Agreement. While it may give more clarity on the problems we face, it brings us no closer to actually solving those problems.

Friday, 8 July 2016

On the 23rd June the UK held a referendum on its membership of the EU and 52% of voters decided we should leave. To put things bluntly - this was the wrong decision. Politicians of all persuasions, however, have been queuing up after the vote to say that we must respect the 'democrat will' of the people. Clearly they do not have much choice, at this stage, given that a majority voted to leave. But, can we really talk of this referendum result as 'democratic'? I don't think so.

To make the case we can start with the impossibility theorems. These theorems, of which Kenneth Arrow's is the most famous prove that there is no voting mechanism that is guaranteed to produce outcomes satisfying some basic desirable properties. For instance, the choice made can be critically influenced by the options on the ballot paper (even if we add options people do not like). There are two basic ways to interpret the impossibility theorems. One is to say that they show there simply is no right decision; if we ask 100 people what they think and we get a 100 different answers then there is no way of determining the optimal thing to do. The other interpretation is to say that a right decision does exist but voting is a very imperfect way of finding it. With either interpretation, democracy does not come out looking particularly good.

There is though one context where voting has been shown to work. It will work, if the decision to be made is a binary one. (This is May's theorem.) The EU referendum was a binary decision - we either remain or leave - and so this surely gives us more faith in the result? Well, the key thing to observe is that framing the question in a binary way does not stop the fundamental issue being non-binary. And this was clearly illustrated in the EU referendum debate. In particular, there was at least three different versions of what would happen if we left the EU: (1) stop immigration, (2) liberalise the economy (meaning more immigration), (3) protect workers right (so de-liberalise the economy). Clearly, these three visions of the future are all incompatible. Which means that many who voted leave are not going to get what they wanted.

Suppose the ballot paper had four options - remain and the three versions of leave. What would the outcome have been then? Indeed, how would the vote have worked. For instance, would voters have been asked to rank choices or just vote for a preferred outcome? We are now firmly in the territory where Arrow's Theorem kicks in. And in all likelihood the outcome, the 'democratic will' of the people, would have been to remain in the EU.

There is a further reason why we should be sceptical of the election results. Standard models of political choice take it as given that voters know what is good for them. That was sadly lacking in this instance. For decades, politicians have found it easier to blame the EU, and then immigrants, for just about every ill that beset the country rather than give the more nuanced truth. This left an open door for leave campaigners to lie and scare. Turkey, for instance, is joining the EU and 17 million Turks are moving to Britain. Etc. If voters are ill-informed then how can we possibly talk of democracy. This is not to slur everyone who voted leave because there clearly are many well-informed people who had good reasons to vote leave. The sad reality, however, is that many of the people who voted leave are those who will suffer most from leaving the EU.

So, what lessons can we take from all this? The main lesson is probably to not have referendums on important issues! Where does that leave democracy? To me, democracy is about electing, in a fair and open way, people to make decisions on our behalf. It is not about ill informed people making decisions for everyone.